Not all European institutions for occupational retirement provision (IORPs) have sufficient assets to cover their liabilities. This was shown in the 2019 IORP stress test carried out by the European Insurance and Occupational Pensions Authority (EIOPA) on a Europe-wide scale. EEIOPA published its stress test report in December 2019. In Germany, IORPs include Pensionskassen and Pensionsfonds.

If the low interest rate environment persists, some of the employers that use an IORP for providing retirement benefits to their employees could incur greater costs in the future, which in turn could have a negative impact on the real economy.

Low interest rate environment as major factor

Frank Grund, Chief Executive Director of BaFin’s Insurance and Pension Funds Supervision states: “The EIOPA stress test has shown that institutions for occupational retirement provision are facing significant challenges in particular due to the low interest rate environment, not only in Germany but also in several other member states. Many IORPs and their sponsoring companies have already taken measures to meet these challenges”.

To promote transparency, EIOPA has for the first time published the names of the IORPs that participated in the stress test.

However, the report neither provides individual results nor does it allow conclusions to be drawn about individual IORPs. One reason for this is the heterogeneity of IORPs not only in the EU but also at the national level.

The objective of the stress test was to assess the resilience of the European IORP sector to potential negative developments on the capital markets. The scenario of the stress test combined a drop in the price of assets with a slight increase in risk-free interest rates. The increase in risk-free interest rates assumed in the scenario resulted in a slightly reduced economic value of the liabilities which, however, was overcompensated by the decline in the assets’ value.

The stress test also examined how the IORPs deal with sustainability risks. It showed that the majority of IORPs have information on the extent to which their assets are exposed to such risks. It can be assumed that EIOPA will continue to pursue this issue.

Design of the stress test

The stress test covered both defined benefit schemes in which benefits are guaranteed to the beneficiaries by the IORP and/or the employer and pure defined contribution (DC) schemes in which no benefits are guaranteed to the beneficiary. Although pure DC schemes have been permissible in Germany since 1 January 2018, they did not exist in practice in Germany at the reporting date, 31 December 2018, to which the stress test referred. This part of the stress test was therefore not relevant for German IORPs.

The stress test for defined benefit schemes was conducted both on the basis of the relevant national accounting standards (in Germany, the German Commercial Code (Handelsgesetzbuch – HGB)) and a uniform European valuation standard developed by EIOPA.

Using the uniform valuation standard, assets and liabilities were valued on a market-consistent basis with risk-free interest rates being applied for the calculation of the technical provisions. Security mechanisms, such as the commitment of employers to provide additional payments to secure benefits and protection by the Pensions-Sicherungs-Verein VVaG (PSVaG), were valued as assets. If the liabilities exceeded the available assets including the relevant security mechanisms under the uniform valuation standard, the value of the technical provisions was reduced such that the value of the liabilities corresponded to the value of the assets. This included the possibility of benefit reductions.

Compared with the previous stress test, EIOPA extended the analysis of cash flows. For example, future cash flows from security mechanisms and potential benefit reductions were also ascertained. It was found that in a stress event, additional payments by employers tended to be particularly high in the first few years after the event, while benefit reductions had an impact over a longer period.

EIOPA strived for a market-coverage of 60% of the respective national IORP sectors. This was achieved in Germany with a selection of Pensionskassen and Pensionsfonds representative of the German market.